Better Understand Your Business Financials with these Tools and Resources

August 10, 2022

This summer, two Entrepreneur Fund staff experts presented for our Women’s Business Alliance’s Ignite Webinar series about building confidence in understanding your business financials. You can watch that full webinar here or keep reading for tips and resources regarding accounting basics, the three financial reports you should be looking at regularly and how to analyze your numbers.

If you’re a small business owner looking to better understand your finances, you’ll want to bookmark this article and the tools/resources linked.

Accounting Basics

Your accounting system, whether it’s QuickBooks, Excel, or something else, should be able to provide you with at least two basic reports: the profit-and-loss statement (income statement) and a balance sheet. From those two reports, you’ll be able to make a set of cash flow projections. While you might have a Point-of-Sale system that generates financial reports, it likely shows a limited amount of information, and you may still need to use another accounting system with it.

It’s important to check your business’s financial reports at least monthly, but you might find you look at some numbers, like cash balances or sales, more often.

Our online learning platform, Initiate, has some helpful articles about basic accounting:

Three Main Financial Reports

1. Profit and Loss Statement

Your Profit and Loss report (also called an Income Statement) shows income and expense activity for a specified period of time (monthly, year-to-date, quarterly or annually). These statements can look different based on business structure, accrual versus cash basis of accounting, and types of income and expenses across industries. This statement is populated by either manually by entering income and expenses, or by using a software such as QuickBooks that can link directly to your bank and credit accounts and pull transactions directly into the system. Profit and loss statements hold powerful insights, especially when used with additional tools such as against your budget, in comparison to your prior year profit and loss, or against industry or market standards.

2. Balance Sheet

A balance sheet shows the financial performance of a company as of a specific point in time. Like the Profit and Loss statement, there are many possible layouts, such as a monthly spread, a year over year comparison, or a regular annual report.

You’ll notice that there are Current Assets and Long-Term Assets, as well as Current Liabilities and Long-Term Liabilities. Current assets are the items a company owns that are expected to turn into cash the soonest. Current liabilities are the bills due the soonest. Long-term assets are the assets the company expects to hold for at least a year, and long-term liabilities are debts that are due over a longer period of time, like bank loans.

A balance sheet also shows equity, which is loosely defined as the dollar amount of the businesses that the owner has a claim to. A company’s assets minus its liabilities equals its equity. If you think about it logically, that formula can basically be explained as “What the business owns, minus what it owes to others, leaves what is left for the owner.”

You may see a line on your balance sheet for Owner Draws. Depending on how your business pays you, you may be either on the payroll or taking a draw. Being on the payroll would show up as an expense on your Profit and Loss statement, while taking a draw shows up on the equity section of your balance sheet.

3. Cash Flow Projections

Cash Flow Projections comes from both the profit and loss statement and the balance sheet.  P&L items are revenue and expense categories, balance sheet items are loans received/loan payments/owner draws/asset purchases. This shows what cash flows are doing each month in your business. The Projections show estimated numbers for future performance. Cash flow projections are a good tool for planning out cash shortages/seasonality/whether you might need a working capital loan or a line of credit.

Analyzing Your Finances

There are four main ways we recommend analyzing your financial statements.

  1. A Historic versus Current Comparison shows trends in your business over time. It is a good way to see if your revenues, expenses, and profit are increasing, decreasing, or staying the same.
  2. A Ratio and Industry Standard Comparison looks at your financial statements and compares them to an average small business in your industry. This helps you see where your business’s strengths and weaknesses are.
  3. A Budget versus Actual comparison shows how you are doing compared to what you expected.
  4. Break Even Points can tell you what dollar amount you need to reach in sales before your business will start turning a profit. This can be customized for your business’s situation to calculate a monthly sales goal, an annual sales goal, a target number of products to sell, billable hours charged to clients, and more.

As always, if you have additional questions or would like help analyzing your finances, reach out to your Entrepreneur Fund advisor. If you don’t have an advisor, contact us at info@entrepreneurfund.org or fill out this short interest form.